Bruckheimer v. Commissioner

DAVID BRUCKHEIMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Bruckheimer v. Commissioner Docket No. 102343. United States Board of Tax Appeals 46 B.T.A. 234; 1942 BTA LEXIS 889; February 3, 1942, Promulgated *889 A corporation reacquired some of its own stock by purchase for cash from its surplus. The reacquired stock, treasury stock, was distributed pro rata to all the stockholders. All the stock was common stock. Held, the distribution of the treasury common stock to the holders of common stock did not constitute income to the distributees. Andrew B. Trudgian, Esq., and Sidney I. Roberts, Esq., for the petitioner. Allen T. Akin, Esq., for the respondent. HARRON *234 Respondent determined a deficiency of $3,157.82 in income tax for 1937. The basic question is whether on the distribution to him of certain shares of stock in the taxable year petitioner received taxable income in the amount of $13,587.65, the fair market value of the shares. The facts have been stipulated. *235 FINDINGS OF FACT. Petitioner has an office in Brooklyn, New York. He filed his income tax return for 1937, the taxable year, with the collector of internal revenue for the first district of New York. In the taxable year, and for some time prior thereto, petitioner served as the president of M. Bruckheimer Sons, Inc., a New York corporation, hereinafter*890 referred to as the corporation. The corporation was engaged in the pawnbrokerage business. Its authorized capital consisted of 2,800 shares of common stock having a par value of $100 per share. On or about December 22, 1936, the corporation had issued 2,640 shares of its common stock. It held 775 shares as treasury stock. There were 1,865 shares outstanding. Petitioner owned 935 shares and the estate of Adolph Bruckheimer owned 930 shares. The principal assets of the estate of Adolph Bruckheimer were the 930 shares of the corporation's stock and a claim in the amount of $73,000 against petitioner. The distributees of the estate of Adolph Bruckheimer and their distributive shares of such estate were as follows: Petitioner 1/8 Marcus Bruckheimer 1/8 Sarah Nathan 1/8 Jerome M. Schwartz 1/8 Marion Goldzier 1/16 Adelaide Bruckheimer 1/16 Brooklyn Federation of Jewish Charities 3/8 On December 22, 1936, the above distributees of the estate of Adolph Bruckheimer, the corporation, and two others entered into a written agreement, consisting of some 26 typewritten pages. The agreement recited, inter alia, that the above distributees desired that*891 the principal assets of the estate be distributed in kind and that the executors of the estate be provided with sufficient moneys to pay the obligations and administration expenses of the estate in order that such distribution might be possible. Paragraph seventh of the agreement provided that in order to furnish the executors of the estate of Adolph Bruckheimer with sufficient moneys to enable them to pay all obligations and administration expenses, the corporation, out of its surplus, was to purchase from them 122 shares of its stock for $187.39 per share, or for a total of $22,861.58. Paragraph second of the agreement provided that after the above purchase of 122 shares, and after payment of all obligations and administration expenses of the estate, the remaining 808 shares held by the estate, as well as the estate's claim against petitioner in the amount of $73,000, were to be distributed in kind to the distributees in the several proportions in which they were entitled to share in the estate. *236 Under paragraph seventh of the agreement, the 122 shares purchased by the corporation were to be held by it as treasury stock until the executors had distributed in kind*892 the remaining 808 shares to the distributees. "Forthwith upon such distribution" the corporation was to declare a dividend of the 122 shares purchased by it and was to distribute such shares to its then stockholders in proportion to their then respective stockholdings as follows: Shares Petitioner 72.51 Marcus Bruckheimer 7.07 Sarah Nathan 7.07 Jerome M. Schwartz 7.07 Adelaide Bruckheimer 3.54 Marion Goldzier 3.54 Brooklyn Federation of Jewish Charities 21.20 Total 122.00 On September 17, 1937, the corporation purchased 122 shares of its stock from the executors of the estate of Adolph Bruckheimer for $22,861.58. Shortly prior to December 20, 1937, the executors of the estate of Adolph Bruckheimer distributed the remaining 808 shares to the distributees according to their distributive shares. At a special meeting held on December 20, 1937, the board of directors of the corporation adopted a resolution providing for the declaration of a dividend in stock payable to its stockholders as follows: Shares Petitioner 72.51 Marcus Bruckheimer 7.07 Sarah Nathan 7.07 Jerome M. Schwartz 7.07 Marion Goldzier 3.54 Edward Ennis 1 3.54 Brooklyn Federation of Jewish Charities 21.20 Total 122.00 *893 The resolution recited that after the declaration and payment of such dividend in stock the value of the corporation's assets would exceed the value of its liabilities, including capital stock liability. At the same meeting the board of directors also adopted resolutions providing for the declaration of a dividend of $6.50 per share, payable in cash, and a dividend of $5.25 per share, payable in noninterest-bearing promissory notes of the corporation maturing December 20, 1938. On December 20, 1937, petitioner received 72.51 shares of the corporation's stock. The fair market value of the corporation's stock on December 20, 1937, was $187.39 per share. The fair market value of the 72.51 shares of the corporation's stock received by petitioner was $13,587.65. The corporation's income tax return for 1937 showed net income of $21,252.55 and normal tax liability of $2,402.83. The return *237 showed no undistributed profits surtax liability. In the computation of the undistributed profits surtax no dividends paid credit was taken with respect to the 122 shares of stock distributed*894 on or about December 20, 1937. Schedule M attached to the return showed total distributions of $44,537.03 to stockholders out of earnings or profits of the taxable year or out of earnings or profits accumulated since February 28, 1913; total taxable distributions of $21,675.45 in cash and notes; and total nontaxable distributions of $22,861.58 in treasury stock. The balance sheet attached to the return showed earned surplus and undivided profits of $146,815.92 as of December 31, 1936, and $121,250.32 as of December 31, 1937. Petitioner's income tax return for 1937 showed net income of $26,322.92 and total tax liability of $2,598.82. The return showed the receipt of $15,200 in salary from the corporation and $13,084.99 in dividends. OPINION. HARRON: The basic question is whether on the distribution to him of the 72.51 shares of the corporation's stock in the taxable year petitioner received taxable income in the amount of $13,587.65, the fair market value of the shares. On his return for the taxable year petitioner did not include any amount in taxable income on account of the receipt of the 72.51 shares. Respondent included the fair market value of the 72.51 shares in*895 taxable income for the taxable year, with the explanation that the shares constituted taxable income under section 115(f) of the Revenue Act of 1936, the pertinent provisions of which are set forth in the margin. 1 In his brief respondent contends that the distribution of the 72.51 shares was either a taxable dividend in property or a taxable stock dividend, and, consequently, the fair market value of the 72.51 shares of stock was includable in taxable income. The respondent included in petitioner's taxable income $13,587.65. Respondent argues that the stock dividend in question was income because it was paid in treasury stock which the corporation had purchased out of its surplus. Respondent says in his brief: The Commissioner's position in this case is based on the proposition that the petitioner*896 received a portion of the corporation's surplus for his own use and benefit when the 72.51 shares of stock were received by him, that he received something of exchangeable value, severed from his investment, and that he *238 had been given an interest in the corporation different from that which his former stock holding represented. Respondent's theory is founded upon the broad proposition that a stock dividend paid in treasury stock should not be treated differently, for income tax purposes, from any dividend paid in property of the corporation. Respondent contends that the stock dividend in question constituted income to the petitioner within the reasoning of Koshland v. Helvering,298 U.S. 441. It should be pointed out that the Commissioner does not question the Bona fides of the transaction. Cf. Ruphane B. Iverson,29 B.T.A. 863. He recognizes the transaction, in all the steps which were taken, and he agrees that the stock dividend was paid out of treasury stock. However, he regards the stock in question as having been acquired by the corporation as an "investment in treasury stock." The taxable year is 1937. The Commissioner*897 promulgated Regulations 94 relating to the Revenue Act of 1936. Respondent cites Article 27(c)-1 of Regulations 94. 2 The Commissioner has ruled that if a dividend is paid in "property", other than money, constituting its corporate assets, then the dividend is a taxable dividend. The term "property" is broadly defined to include shares of capital stock of the corporation "if such shares of stock are held by it as an investment." The regulation then injects a presumption to the effect that shares of capital stock once issued but later reacquired in any manner, but not retired, "shall be deemed to be held by the corporation as an investment." Respondent, applying this regulation here, has determined that the stock which the corporation reacquired by purchase from the Bruckheimer estate was "property" of the corporation constituting part of its corporate assets. *898 In commenting upon the above ruling, the following is stated in Paul & Mertens, Law of Federal Income Taxation, Cum. Supp. 1939, p. 294, par. 8.82: Whether this regulation is of constitutional validity in its application to distributions of Treasury common stock, to holders of common stock, would *239 seem to depend on whether Treasury shares are truly assets of the corporation in such sense as to be accorded like treatment with shares of another corporation held by the issuing corporation. The comment indicates the importance of the question. In James Kay,28 B.T.A. 331, involving similar facts, except that the corporation there did not treat its own stock which it purchased as treasury stock, we held that stock distributed out of stock purchased by a corporation for its own account constituted a stock dividend. In the result reached in that case the stock dividend in question was a nontaxable stock dividend. That opinion was promulgated on June 8, 1933, which was prior to the decision in the Koshland case, supra, the revision in the Commissioner's regulations, and the elimination from the statute of the broad provision exempting stock dividends*899 from tax. See section 115(f)(1) and section 27(c) of the Revenue Act of 1936. Cf. Section 115(f) of the Revenue Act of 1934. It appears, therefore, that we should reexamine the question, under the facts of this case. The corporation involved here had only one kind of stock outstanding, common stock. The stock which was distributed, the treasury stock, was distributed to all of the stockholders in proportion to their stockholdings in December of 1937. In Eisner v. Macomber,252 U.S. 189, it was held that a distribution of common stock as a dividend on common stock did not constitute income. Is not that holding applicable here? Does it make a material difference that the stock distributed here was treasury stock? It is clear that the distribution of the stock in question did not confer any different rights or interests than did the stock already held by the stockholders. The new certificates, plus the old, represented the same proportionate interest in the net assets of the corporation as did the old. Cf. *900 Koshland v. Helvering, supra.In our opinion it makes no difference that the stock which was distributed was treasury stock. The argument of respondent is based largely upon an assumption that the reacquired stock was an asset, property, of the corporation. That assumption appears to be against the weight of authority. Treasury stock is usually regarded as "retired" in the sense that it no longer constitutes a liability of the corporation because a corporation can have no right of action against itself. See Borg v. International Silver Co., 11 Fed.(2d) 147, 150, where it was said by the Circuit Court of Appeals for the Secound Circuit: Indeed, the only difference between a share held in the treasury and one retired is that the first may be resold for what it will fetch on the market, while the second has disappeared altogether. * * * They (Treasury stock) are not a present asset, because, as they stand, the defendant (the corporation) cannot collect upon them. What in fact they are is an opportunity to acquire new assets for the corporate Treasury by creating new obligations. *240 Most authorities lead to the view that treasury*901 stock is not stock at all. See Virginia Law Review, vol. 15, pp. 637, 638, where it is said: * * * Whenever a corporation gives anything for its own stock, the corporation is out an asset. Against that it has left only the possibility that some day, under some circumstances, it may succeed in getting value back into the treasury to replace the value it has lost, by the process of again selling this "treasury stock" which meanwhile, in actual truth, represents a void. See also Model Corporation Act, Harvard Law Review, vol. 48, p. 1373: "Treasury shares shall not be considered or carried as an asset for any purpose." In our opinion it is an exceedingly doubtful theory that reacquired stock such as is involved here is to be treated as "property" in the way that stock of another corporation held in a corporation's assets is property. Unless it can be held that the stock which was distributed to petitioner was "property", as in the latter instance, we can not hold that the petitioner realized "income" upon receipt of the stock in question. To whatever extent article 27(c)-1 of Regulations 94 is appropriately applicable here, it must be concluded that the stock dividend in*902 question was not paid in "property" of the corporation. It is held that the stock dividend in question did not constitute income to the petitioner. Decision will be entered for the petitioner. Footnotes 1. Edward Ennis appears to be the transferee of the interest of Adelaide Bruckheimer. ↩ 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS. * * * (f) STOCK DIVIDENDS - (1) GENERAL RULE. - A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution. * * * ↩ 2. ART. 27(c)-1. Dividends in kind. - Section 27(c) imposes limitations upon the extent to which dividends paid in assets (other than money) may be recognized for purposes of determining the amount of the dividends paid credit. Irrespective of the form of the corporate resolution by which a dividend is declared, if the dividend is ultimately and actually paid by the corporation in any property other than money, constituting its corporate assets, the amount of the dividends paid credit to which the corporation is entitled with respect thereto can not exceed the lesser of the two following amounts determined as of the time of payment: (1) The adjusted basis of such property in the hands of the corporation as provided for in section 113; or (2) The fair market value of such property. As used in this article the term "property" includes shares of capital stock of the corporation making the dividend distribution if such shares of stock are held by it as an investment. Unless shown to the contrary, shares of capital stock once issued but thereafter acquired by the corporation in any manner whatsoever, but not retired, shall be deemed to be held by the corporation as an investment. * * * ↩